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Activity based costing or ABC in management accounting pertains to the process wherein resources gain costs, activities use resources and cost objects like products, services and customers move in activities (Atkinson et al., 2001). The said resource costs have 2 stages. Firstly, the costs of these different resources are designated in particular activities. Secondly, the costs used in activities are interlinked with the objects that have definite costs and used in the activities.
How is an ABC Model Designed in a Company?
List down the company's main activities and write an activity dictionary to keep things organized.
Define particularly the resources and its costs needed to be used in a company activity.
Mapped goals and objectives of the activities.
Use tools for measurement of starting activities in order to know reasons behind why the activity is needed to be pursued by the company.
Calculate the activity rate with this formula:
Activity cost driver rate = Normal cost of support activity ÷ Normal level of driver wherein: normal level - long run capacity
The computed activity cost driver rates should be assigned to cost objects.
What are the Barriers to Implementing an ABC Model?
Shortage of a comprehensible business purpose - ABC is not sufficed to be an accounting exercise in whole. To this, it must be designated with a particular purpose like to improve the redesign of processes,Â endow better product change decisions, or to affect product design alterations.
Poor top management support - in order to gain the cross-functional support, there should be formed new initiative for the company to perform management actions, since the ABC model needs the support of senior management.
Entrusting the ABC project to the chosen consultants - a lot of consulting firms endow services features of software and consulting, which are needed for developing ABC models. Yet, cross functional teams assigned in the company are also needed to gain success in project implementations.Â Â
A substandard ABC design - if there are too much measurements or complex measurements with ineffective time consuming, the design needs to add more work for people who see no benefits.
Added risks in change.Â
Just-in-time or JIT bears the elements and practices of a philosophy in capitalism. It is applicable to any type of company. Also, its practice elements are applicable to repetitive manufacturing operations like production and assembly of products. Specifically, JIT is defined as a method of production or inventory scheduling. JIT is more appropriately thought of as a philosophy because, even though it includes a variety of techniques, it is much more than a collection of management practices. Today, there is still no found operational definition of JIT. Basically, it is known as the elimination of waste and excess of companies in their acquired resources and performed activities, which are complementary to the needs of customers. One good example of a JIT report are the inventory buffers, wherein defective parts, production specifications, long machine set-ups and competitive behaviour inside the company are discussed.
JIT has 2 main elements: attitude and practice. The first one is adopted by any company, while the second one is only applicable to companies with repetitive manufacturing. If seen in an accounting viewpoint, these are companies that usually use the process cost accumulation method in improving their operations.
JIT is closely related to Total Quality Management or TQM. Compared to TQM, it focuses on reducing the company lot size, cutting down inventory levels, advancing flexibility, and eliminating all production waste (Hutchinson, 2007). These 2 has a very strong relationship in management accounting. Moreover, they can be implemented together with infrastructural practices and evident synergistic effect. TQM result to quality levels needed by the JIT measures to be able to reduce the lot sizes and inventory levels of the company. Reciprocally, the lowered inventory allows more opportunities in the process improvements. Furthermore, there have been claims that the TQM/JIT movement in a company gave birth to Time-Based Manufacturing or TBM. In the history of the industry, the past business competitors were innovators using TQM/JIT tools and concepts that reaches arguments beyond the company boundaries, but affects the entire value chain. The said TBM will promise gains in customer satisfaction if there is a faster service and higher quality. In the end, the companies have long realized that factors of speed and quality are vital in premium pricing of products and reduce internal costs if maintained in the long run. This leads to greater profitability. TBM is a natural evolution from the companies' TQM/JIT philosophy, but with added capabilities. At times, it is hard to distinguish JIT with TBM.
The business transformation strategies for change have 5 levels that are based from benefit levels to a company. When objectives are improved, the process undertakes certain fundamental changes on the business processes in 3 levels: business process reengineering or BPR, business network, and scope advancement. Particularly, the BPR is middle aspect found in the incremental changes and radical changes of a company (Joseph, 2006). It acts on fundamental changes for revamping the process design of the company like projects for exploiting technological capabilities. The past records of management history and principles used by the company are greatly used in BPR, but also allow opportunities to aid in the improvement of design process. Business network is instigated in business process redesigning in order to redefine, "the nature of relationships among multiple external participants in the business network", which will offer products and services of the company in the market. Successful strategies are improving the company positions in terms of its technologies, products and markets. For example, the positive gains of technological innovation can lead to improvement of the benefits of innovation into a totally different product. BPR formed as a response to the call of companies to be leaner and more flexible in the industry. What appear to be important in BPR is that employees modify their behaviour due to the growing expectations of the business culture of the company they are working in. This is a vital aspect of reengineering the organization, which gives importance to changes experienced by the company in terms of its culture that happens in the reengineering process (Williamson & Sherrard, 1996).
One good example of the said business culture change is when the results of an activity or project of a company are very different from the results that its management requires. Usually, the managing heads of the reengineering theory remain firm that the problems are due to the task-oriented, narrowed individualized focus on recognizing and poor lauding in outstanding tasks or student achievements. In summary, the success of a company is at stake when its departments or functions are hurt. Success in whole takes all employees and not the company alone. In this lieu, a successful reengineering should improve the goals of the company from just being individual and task-oriented into a broad focus on customer values that are catering to their needs, employee values desired by them, and an emphasis on the processes vital to achieve the said company goals instead of biased emphasis on the individual employee tasks. BPR is flexible to accommodate the customer needs and endow the opportunity required to lead in competence in the industry. When using BPR, a strategic analysis takes place in order to define the optimal areas for resource allocation, "based on fundamental shifts in competence due to technological and strategic enablement" (Joseph, 2006). A BPR is formed by effectively defining and implementing successful strategies in a given department. This will alter in a positive or negative way the products, technologies and markets of a company, depending on the BPR results. For example, when a desk in a company like the purchasing desk earns more praises and good evaluation by the top management team, it can become an independent department, which is the purchasing department.